Mitul Kotecha: Euro falls, yen rises as risk aversion picks up

The USD index is quickly slipping back to its mid September lows, although downside momentum has been restrained by an overnight jump in risk aversion. The USD had been undermined by a continued improvement in risk appetite as markets expect (hope) that a deal to avert the fiscal cliff can be averted although recent developments have not been encouraging on this front. Additionally, given the relative strong performance of US equities this year there may be an element of profits repatriation out of the US weighing on the USD. A likely upward revision to US Q3 GDP, rise in the Philly Fed survey manufacturing, and existing home sales, will if anything imply firmer risk appetite and consequent USD weakness.

EUR/USD is trading close to multi month highs but dropped from a high of 1.3309 overnight despite a firmer than expected reading for the December German IFO survey on renewed caution over a deal to avert the fiscal cliff. News flow has provided some impetus to the EUR over recent weeks following recent agreements by European leaders on issues such as banking supervision and a positive Greek debt buyback. Such progress has set the background for a firm end to the year for the currency. Nonetheless, as reflected in its drop overnight any increase in risk aversion will limit the ability of the EUR to move higher. Additionally the EUR will be restrained by caution expressed by the Greek finance minister in the FT over the country’s future highlighting that Greece is not out of the woods yet.

The JPY’s slide has continued unabated ahead of today’s BoJ policy decision. Markets have already priced in further easing in the form of an increase in asset purchases and any outcome that reveals anything less than JPY 10 trilion in asset purchases will provoke JPY buying in a market that is heavily short. However, the LDP’s strong showing in elections implies that markets will need to take seriously threats of more aggressive policy action over coming months, especially with regard to JPY strength. Indeed, weak export data revealed yesterday, while not solely attributable to JPY strength, will nonetheless, fuel more pressure for a weaker currency. Therefore, any pull back in USD/JPY will prove short lived as investors once again eye the JPY as the favoured short leg of carry trades.

About Mitul Kotecha

I have worked in the financial industry as a strategist/economist for over 18-years in several corporate and investment banks in London. I have covered a range of financial products including bonds, interest rates, equities and foreign exchange.

I am currently working in Hong Kong for Crédit Agricole Corporate & Investment Bank, where I am the head of global currency strategy, in charge of a team of analysts providing research and strategy for the bank’s clients and internal trading and sales teams.

I hold an honours degree in economics and a masters degree in economics and finance and have developed a comprehensive knowledge of economic and financial theory during my studies and in my employment.

I am regularly consulted by the press/media for my views on markets and economies appearing regularly on business channels such as CNBC, Bloomberg TV, Channel News Asia, and Reuters TV. I am also regularly quoted in various newspapers including the Financial Times and Wall St. Journal as well as various newswires including Reuters, Bloomberg, Associated Press, Dow Jones and many others.